Cut Medicare? OK, But How?

By Alicia H. Munnell

Everyone wants to cut Medicare, it seems. Congressional Republicans have pledged to cut funding to the program, and the party’s presidential candidates may reaffirm that commitment during tonight’s debate. President Obama indicated his willingness to do the same in his address to Congress earlier this month. Certainly Medicare is a major contributor to the deficit, and reducing Medicare costs would help the long-run fiscal outlook. The question is how to cut the program. The smart cuts can’t be done by politicians, but rather involve eliminating unnecessary medical spending. All the usual suspects have the potential to do more harm than good.

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Raise the age of eligibility from 65 to 67. Such an increase would bring Medicare eligibility in line with the Social Security full retirement age. It could also encourage people to delay retirement so they do not spend periods without health insurance. But basically, this is a cost-shifting proposal: Medicare costs would go down, but individuals and employers that offer retiree health insurance (a dwindling number, at that) would have to pay more. States’ spending on Medicaid would also rise.

Raise Part B premiums to 35% of program costs. For a monthly premium, Medicare Part B provides coverage for physician services and other outpatient services. The current standard Part B premium is $115.40, which covers 25% of the program’s costs. Raising the premium by $46.16 per month to $161.56 would cover 35% of program costs. This is another form of cost shifting: Participants would pay more; so would states that pay premiums for people eligible for coverage through both Medicare and Medicaid.

Means-test premiums. If the program is in trouble, why not make higher-income people pay more? The answer here is that they already do. As the table below shows, Medicare Part B premiums for people earning $214,000 or more aremore than triple the standard premium. Premiums for Medicare Part D, the prescription drug program, are also more expensive for higher earners.

Individual Medicare Part B Premiums, 2011*

Individual modified adjusted gross income:

$85,000 or less: $115.40

$85,000-$107,000: $161.50

$107,000-$160,000: $230.70

$160,000-$214,000: $299.90

$214,00 or more: $369.10

Raise co-payments and deductibles. Medicare Part A (primarily hospital and post-acute care) has a deductible of $1,132 for “each spell of illness” and enrollees are subject to substantial daily copayments for extended hospital and skilled nursing stays. Medicare Part B has an annual deductible of $162 and a co-payment of 20% for most services, a higher percent for others. Because the cost-sharing requirements are substantial, most participants sign up for supplemental coverage through their employers, a Medigap policy, or Medicaid. Nevertheless, the risk with raising co-pays and deductibles is that people forego primary care visits and end up being hospitalized with more expensive problems.

Cut payments to providers. Across-the-board cuts, which will kick in if the special congressional committee does not reach agreement, raise two issues. First, they do not distinguish between providers or between services. In high spending areas, all providers would face cuts, even those that did not contribute to the problem. Similarly, payments for all services, regardless of their value to the patient, would be cut. Second, they are very hard to enforce as evidenced by the fact that Congress has repeatedly overridden dollar caps on payments to physicians.

If the usual suspects aren’t the answer, then how do we get Medicare spending under control? Here, I am not the expert, but one issue is the extent to which doctors practice defensive medicine because of fear of being sued. If frivolous lawsuits are a real problem, then tort reform would help.

Another area for reform may be treatments that are either not effective or more expensive than others that would produce equally good results. In a recent New York Times Op-ed “Cut Medicare, Help Patients,” Ezekiel J. Emanuel and Jeffrey B. Liebman cited a number of such ineffective or excessively expensive treatments that are currently covered by Medicare, including colonoscopies for people over 75 even though researchers find no evidence they save lives, Avastin for the treatment of breast cancer even though the Food and Drug Administration found it is not effective, and stents for heart patients without trying less expensive drug therapy first.

Eliminating such ineffective and inappropriate treatments is the best way to control Medicare spending and reduce the deficit. Congress cannot select medications and procedures; only doctors and hospitals can. They are more likely to do it if payments are based on the quality of the care provided patients than on the number of procedures. None of the usual suspects for cutting Medicare are likely to improve the incentives to practice better medicine.

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About Encore

Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.